By Hamlin Lovell, NordicInvestor

Outi Kalpio, Director of Portfolio Management and ESG at LocalTapiola Asset Management Ltd in Espoo has been with the company for 24 years. ESG integration has been part of her work since 2007. “Overall ESG is one part of risk management and one driver of long-term equity and fixed income returns, but is not the only driver,” she points out. Kalpio has also chaired FinSif, Finland’s Sustainable Investing Forum.

LT AM’s ESG priorities have been stable for years though there are tweaks of priority and emphasis. “Climate change mitigation and adaptation are the ‘E’ priorities but biodiversity has been added to them. Under ‘S’ working conditions and human rights are key and just transition is another factor that ties in with the ‘E’. Corporate governance, board structure, directors’ independence and diversity remain priorities for the ‘G’,” explains Kalpio.

Benchmark alignment with ESG policies

Benchmarks remain a potential complication when implementing ESG policies for some LTAM clients: “Institutional clients are becoming more granular with their ESG preferences, but this is still not reflected in their choice of benchmarks. They may specify net zero targets but this is problematic if the benchmark does not match that. We want to help clients but this is difficult if they insist on a regular benchmark,” says Kalpio.

Disclosure labels: mainly SFDR 8

Some 65-70% of LTAM funds report under SFDR article 8, 10% under article 9 and the rest under article 6.

Some of the article “8 Plus” funds have at least 3% in taxonomy aligned investments while the article 9 funds have at least 10%.

Article 8 funds are mainly characterized as “ESG Integration” while some others could be dubbed “sustainable/transition” and article 9 needs to be nearly 100% sustainable.

Defining and labelling impact

Communication around impact investing is more complicated. “There is no consensus on how to define impact investing, and we did not get clarity from new ESMA recommendations. We are cautious on labelling a Green bond fund as “impact” as long as we don’t have common definition and product categorizations,” says Kalpio.

Exclusions and selective disclosure

The exclusions policy has been somewhat refined. A list of companies breaching norms, or active in areas such as controversial weapons, is published and has grown longer since a new service provider now offers more granular data.

Updated defence criteria

Other exclusions include tobacco, gambling and adult entertainment.

“Policies around defence have been updated in response to a recent change of tone in Europe regarding co-financing of defense investments, focus on resilience and rapid technological development leading to increasing dual use. Controversial weapons are still excluded, though the nuances are important. Our current policy is: to exclude biological and chemical weapons and to exclude other controversial weapons if domiciled outside of EU/Nato country,” points out Kalpio.

There are also limitations regarding investments in coal or coal-intensive industries.

Readers should visit LocalTapiola AM’s website for more detail on the updated exclusion policy.

Proxy voting and collaborative engagement

Proxy voting is carried out for most markets and strategies.

“Engagement has increased especially in relation to net zero commitments and real-world changes. SFDR also encourages engagement around PAI (Principal Adverse Impact) indicators,” says Kalpio.

Most of the engagement is collaborative, through groups such as PRI, CDP and Climate Action 100 Plus and service providers. “Collaboration is important and powerful on systemic issues. It can be a more efficient way to engage,” says Kalpio.

Direct engagement for smaller and local companies – and credit

“We also keep up with direct engagement for smaller and more local companies that are out of scope for collaboration, since the collaborative engagement targets larger companies. This also means that the more active portfolios are also out of scope for collaborative engagement due to their long duration,” explains Kalpio.

Some investors question whether engagement for credit investments can have much power since they do not have formal voting rights in the same way as shareholders, but Kalpio is much more optimistic. “We also think that credit investors can have a significant impact through engagement. Smaller companies may not understand the power of credit investors but they should learn this,” argues Kalpio.

Impact in emerging markets and DM infrastructure

The greatest potential for positive impact depends on the focus area. “Emerging markets offer most transition impact, but in developed markets infrastructure can offer considerable potential for transition. Meanwhile industrial sectors need to embrace climate solutions,” says Kalpio.

Data harmonization and CSRD

Harmonized and standardized data indicators are still lacking in many other areas: “indicators are pointless if the data is not standardized because you cannot compare two similar funds, which then defeats the whole object of the regulations in the first place. But this should improve: CSRD should help to harmonise certain indicators,” Kalpio expects.

On April 3 2025 the European parliament voted to delay CSRD and CS3D, and CSRD has also been diluted. Nonetheless some companies are still moving forward with big ambitions.

“Implementation of CSRD has already been started by the “first wave” companies and it would be lunacy for these companies to stop the progress now when they’ve done a big part of the work – that would not be appreciated by the (European) investors. When we get more clarity about the final proposals for the next wave companies, we will be wiser. It may even be beneficial for some companies to stand out as leaders in CSRD if peer companies are falling behind,” says Kalpio.

There is however a lot of uncertainty and there is a risk that the reporting will not be as comprehensive and standardized as investors need: “The focus in Europe seems to be in cutting regulatory and reporting burden for companies. It is understandable to try and cut the bureaucracy but there are definitely a lot of risks for investors. We may end up with an even bigger mis-match between company and investor requirements. We may have difficulties in getting meaningful and standardized data from the investee companies, which could hinder making fact-based sustainable investments in the future”.

Proprietary analytics

Traditional ESG ratings are one metric but they need additional work to become fit for purpose. “We apply our own internal analysis and calculations to data gathered from companies or data providers” says Kalpio.

Enhancing AI analytics

“AI and algorithms have made some improvements but also have further to go since the data is often too backward looking. They need to make the data more forward looking for investment decisions and ESG preferences. The Finnish Upright Project, calculating for instance net impact and double materiality analysis, is one example of a helpful development,” points out Kalpio.

Multiple climate reporting standards and guidelines

Climate reporting standards include TCFD, CSRD, IFRS and GRI  and there are also guidelines that are not strictly speaking standards. These are all examples where harmonization would be welcome: “global companies may need to report on three or four different climate standards. We also need to compare various regulations such as the UK and Canadian taxonomy. It would be great to have global standards,” says Kalpio.

Carbon targets

By the end of 2023 LTAM had already reached its interim 2030 target for cutting carbon footprint of direct equity and credit investments by 50%. “Better data in Asia enabling policy restrictions and changes of strategy in some funds were helpful,” points out Kalpio.

The firm recalculated new interim targets at year end 2024. Main focus is in expanding the scope as percentage of AUM and increasing investments in climate solutions.

Overall LTAM believe in ESG and material targets for transition and engagement and the power of data improvements: “Data will become increasingly important in future to inform fact-based decisions about investments, transparent reporting and impact and find ways to make companies more accountable as well as influencing policymakers”.

The new US administration is leading some people to predict the end of ESG investing but we looked at two areas where some journalists may be jumping to overly hasty conclusions.

Trump and carbon: company specific analysis is needed

The US has again withdrawn from the Paris agreement, just as Trump did during his first term. The jury is still out on whether US companies are firmly committed to the agreement

Kalpio observes: “It seems that at least some of the US companies are continuing with their efforts to either cut further their co2 emissions or to “off-set” them somehow. On the other hand, some companies are scaling back on their targets. It is hard to say if this is because of Trump policies or their own thinking if original targets have proven to be too optimistic to realize”.

However, there is a big risk that the US economy as a whole will not benefit from investments in climate mitigation or adaptation. Investors interested in these opportunities will look elsewhere.

Trump cannot kill DEI

There are fears that the new US administration threatens DEI policies, although formally ruling out DEI for US federal government recruitment only applies to a small part of the US workforce. Kalpio expects private companies will continue adhering to DEI: “it makes perfect sense business wise to try and attract best talent regardless of sex, ethnic background etc. Also, judging from recent proxy voting season in the US, shareholders are massively in support of maintaining DEI policies”.